What is happening to the housing market in our area is very interesting. We live in a VHCOL area. The job growth has been very strong. But the new tax law has already had a profound effect on the housing market.

In our personal microcosm of a real estate market, a subsegment of the local market, (our very commutable village close to the large city near by) the lower cost homes are being aggressively sought by the millennials starting families. These homes go into multiple bids. The loss of the tax deduction on the property taxes is probably increasing the true cost of the taxes on these homes by 25% to 30%. But the property taxes are only 20-30k for these smaller 3 bedroom homes.

In contrast, the expensive homes are just sitting on the market with no buyers. This is directly related to the change in the tax law. The property taxes were previously onerous, but they were deductible on both state and federal income taxes. Living in a high tax state, the highly compensated folks buying the expensive homes were typically in a combined marginal rate situation of around 46%. So almost half of those expensive property taxes got paid by a tax deduction, and the other half was paid by the homeowner. That is how people were justifying 60k in property taxes, “Half is paid by the deduction.” Now that has all changed.

The property taxes here are leading these larger, expensive homes to cut prices repeatedly, while the smaller, relatively speaking affordable homes are appreciating. This is creating a compression of the market towards the middle, higher priced homes falling in value and lower priced homes appreciating. There is a very interesting and unique dynamic going on. I am not sure where it will end.

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This is fascinating. Thank you for posting. If and when you see the dynamics change, would appreciate an update.

What is happening to the housing market in our area is very interesting. We live in a VHCOL area. The job growth has been very strong. But the new tax law has already had a profound effect on the housing market.

In our personal microcosm of a real estate market, a subsegment of the local market, (our very commutable village close to the large city near by) the lower cost homes are being aggressively sought by the millennials starting families. These homes go into multiple bids. The loss of the tax deduction on the property taxes is probably increasing the true cost of the taxes on these homes by 25% to 30%. But the property taxes are only 20-30k for these smaller 3 bedroom homes.

In contrast, the expensive homes are just sitting on the market with no buyers. This is directly related to the change in the tax law. The property taxes were previously onerous, but they were deductible on both state and federal income taxes. Living in a high tax state, the highly compensated folks buying the expensive homes were typically in a combined marginal rate situation of around 46%. So almost half of those expensive property taxes got paid by a tax deduction, and the other half was paid by the homeowner. That is how people were justifying 60k in property taxes, “Half is paid by the deduction.” Now that has all changed.

The property taxes here are leading these larger, expensive homes to cut prices repeatedly, while the smaller, relatively speaking affordable homes are appreciating. This is creating a compression of the market towards the middle, higher priced homes falling in value and lower priced homes appreciating. There is a very interesting and unique dynamic going on. I am not sure where it will end.

Click to expand…

The only challenge/question to this I’d have is AMT. I hear people complain a lot about losing SALT deductions, but a large majority of people I know buying more expensive houses (in my area, $750k to $2M, so admittedly probably a little lower threshold than where you are) are in the sweet spot for what used to be AMT – meaning, they never got the property tax deduction in the first place.

Would you say that’s not the case in your area? That these people were not getting hit with AMT under the old tax rules and in fact got to deduct their property taxes?

What is happening to the housing market in our area is very interesting. We live in a VHCOL area. The job growth has been very strong. But the new tax law has already had a profound effect on the housing market.

In our personal microcosm of a real estate market, a subsegment of the local market, (our very commutable village close to the large city near by) the lower cost homes are being aggressively sought by the millennials starting families. These homes go into multiple bids. The loss of the tax deduction on the property taxes is probably increasing the true cost of the taxes on these homes by 25% to 30%. But the property taxes are only 20-30k for these smaller 3 bedroom homes.

In contrast, the expensive homes are just sitting on the market with no buyers. This is directly related to the change in the tax law. The property taxes were previously onerous, but they were deductible on both state and federal income taxes. Living in a high tax state, the highly compensated folks buying the expensive homes were typically in a combined marginal rate situation of around 46%. So almost half of those expensive property taxes got paid by a tax deduction, and the other half was paid by the homeowner. That is how people were justifying 60k in property taxes, “Half is paid by the deduction.” Now that has all changed.

The property taxes here are leading these larger, expensive homes to cut prices repeatedly, while the smaller, relatively speaking affordable homes are appreciating. This is creating a compression of the market towards the middle, higher priced homes falling in value and lower priced homes appreciating. There is a very interesting and unique dynamic going on. I am not sure where it will end.

Click to expand…

The only challenge/question to this I’d have is AMT. I hear people complain a lot about losing SALT deductions, but a large majority of people I know buying more expensive houses (in my area, $750k to $2M, so admittedly probably a little lower threshold than where you are) are in the sweet spot for what used to be AMT – meaning, they never got the property tax deduction in the first place.

Would you say that’s not the case in your area? That these people were not getting hit with AMT under the old tax rules and in fact got to deduct their property taxes?

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The higher end of the market in this village is 1.5M to 3M. So by the time many folks get into the very high income brackets to afford those homes, the regular income tax would be high enough to avoid AMT.

I am a bit worried I will pay CGT on my primary residence when I sell it.

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I was just pointing out that if I made $500k profit on AAPL or FB or AMZN, people would think it’s crazy to not pay capital gains taxes on the profit (If I sold them).

I’ve never understood why housing gets an exemption. Between that and falling interest rates, it contributes to a lot of the upward rise in housing prices (since Americans in general buy houses based on monthly payment, not what they are worth)

As for your situation, if you bought a $1M house and it appreciated to $2M, you would only pay Capital Gains taxes on $500k. At 20%, that’s only $100k in taxes (on a $2M sale). And that’s assume you made no upgrades/repairs/etc (which would all raise your cost basis) and lower the amount of tax that you paid.

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I agree. People pay monthly repayments not the principle amount. It took me a while to realize this. Many things flow from this that I had been fighting not to realize before like: why interest rates have such a disproportional effect, why markets can become unaffordable and beyond.

Also agree with CGT, it should all be equal, but it’s not.

I have this somewhat dytsopian view of cities, that they’re likely to get bigger and more expensive. They will tend towards peoples uncle points for affordability. Unless there’s war, I can’t see why houses won’t keep becoming more unaffordable. It wouldn’t surprise me to see the affordability becoming much more of an issue in the future, when the average city household price to income ratio is 8 or beyond.

The US still has incredibly affordable housing. It wouldn’t surprise me if it catches up to international peers at some stage in the future (but this could take decades). Everyone needs a house so it gets to their uncle point. That’s my theory. I actually don’t think there was a bubble in housing in 2008, just some overenthusiastic speculation.

I have this somewhat dytsopian view of cities, that they’re likely to get bigger and more expensive.

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They don’t have to be. Japan is great example of mega cities with extremely reasonable rents and cost of living. Why? They allow anyone anywhere to build up and when prices rise to a certain points, less valuable properties are razed and converted to high rises. No NIMBY. It isn’t allowed.

SF, NYC, DC, LA could allow for more high rises and put downward pressure on costs. Come to Philly where housing is still reasonably cheap 😉

Tangent – Amazon putting their second HQ in DC and NYC only adds to the problem. I was rooting for some other location besides an already successful mega-metropolis.

I have this somewhat dytsopian view of cities, that they’re likely to get bigger and more expensive.

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They don’t have to be. Japan is great example of mega cities with extremely reasonable rents and cost of living. Why? They allow anyone anywhere to build up and when prices rise to a certain points, less valuable properties are razed and converted to high rises. No NIMBY. It isn’t allowed.

SF, NYC, DC, LA could allow for more high rises and put downward pressure on costs. Come to Philly where housing is still reasonably cheap

Tangent – Amazon putting their second HQ in DC and NYC only adds to the problem. I was rooting for some other location besides an already successful mega-metropolis.

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That Japan is affordable is all demographics. Yes there are lots of building constraints and we have a paucity of starter homes, this I think will be fixed soon. Tokyo was once worth more than all us RE.